UN report calls for new global reserve currency to replace U.S. dollar

08:11, June 30, 2010

A new United Nations report on Tuesday called for the creation of a new global reserve currency to replace the U.S. dollar as the single major reserve currency.

"A new global reserve system could be created, one that no longer relies on the United States dollar as the single major reserve currency," said the report, titled World Economic and Social Survey 2010: Retooling Global Development.

"The dollar has proved not to be a stable store of value, which is a requisite for a stable reserve currency," it said.

The report pointed to "a trap inherent in the reserve and payment system, whereby reserve-creating countries are able to run payments deficits as long as other countries find it in their interest to keep building up their international reserves in the currencies of the reserve-creating countries."

"If this trap is not eliminated, all financial regulatory reform will come to nought," it warned.

A new system should allow for better pooling of reserves at the regional and international levels, it said.

"It must not be based on a single currency or even multiple national currencies but, instead, should permit the emission of international liquidity (such as SDRs) to create a more stable global financial system."

"A feasible evolutionary path towards a more stable system is one along which there is an increased use of SDRs, within a system of nationally supplied reserve assets, dominated by the dollar," it said.

The SDR, or Special Drawing Rights, is an international reserve asset, created by the International Monetary Fund (IMF) in 1969 to supplement its member countries' official reserves.

Its value is based on a basket of four key international currencies -- the dollar, the euro, the Japanese yen and the pound sterling, and SDRs can be exchanged for freely usable currencies.

"In the future and given the changing weights in the global economy, other currencies, including those of emerging market economies, would need to be included in the SDR basket," said the report.

The report suggested that IMF members start a process directed towards increasing the use of SDRs as a currency for central bank operations among themselves.

In this regard, the report indicated that under the present rules, the United States has a single-country blocking vote on the issue of increased SDR allocations.

"SDRs could be increased through periodic allocations in line with the expansion of international commerce," it stressed.

"To summarize, reducing dependence on the dollar through increased use of a created currency made up of a basket of currencies such as the SDR could be a significant step towards greater stability in the world economy," the report concluded.